Hospitals face another year of tight Medicare reimbursement, with rates for FY 2014 falling farther behind cost increases and margins declining as a result.  Most hospitals already lose money on caring for Medicare and Medicaid patients.  Hospitals are entering a far more challenging new business environment under the Affordable Care Act, which will cut Medicare and Medicaid payments, cover millions of new consumers, fundamentally transform the health insurance marketplace, and force consolidation.  Meanwhile, purchasers and payors are reforming payment methods to drive increased efficiency in the hospital industry.

Inpatient hospital services make up the single largest category of Medicare spending, at $133 billion in FY 2011, or about 25 percent of the Medicare budget. Inpatient hospital visits, along with post-acute care, are paid under Medicare Part A. Funding for Part A hospital insurance comes from payroll taxes, the Part A deductible, and taxpayer subsidies.

Outpatient hospital services, ambulatory care, some home health care, and physician visits are covered under Medicare Part B.  Medicare Part A and Part B services are available through Medicare Advantage health plans and traditional fee-for-service Medicare.

MedPAC Recommendations on Medicare Hospital Reimbursement:

Each year, the Medicare Payment Advisory Commission (MedPAC) reports to Congress on whether fee-for-service Medicare payment policies are adequate and on reforms to Medicare payment methods and care delivery models.

For example, last year MedPAC recommended equalizing payments for physician evaluation and management services, regardless of whether they were in a hospital or in a doctor’s office. Increasingly, providers bill for evaluation and management visits as hospital services, instead of physician office services, because the hospital visits have a higher payment rate.

For FY 2014, recommendations for Medicare hospital payments in the 2013 MedPAC Report to Congress are more straightforward:

“Congress should increase payment rates for the inpatient and outpatient prospective payment systems in 2014 by 1 percent. For inpatient services, the Congress should also require the Secretary of Health and Human Services to use the difference between the statutory update and the recommended 1 percent update to offset increases in payment rates due to documentation and coding changes and to recover past overpayments.”

Medicare Hospital Margins, Usage Data:

While the recommendation seems relatively simple, MedPAC’s excellent staff and savvy Commissioners puts a lot of thought into determining whether Medicare payment rates are where they should be.  MedPAC reports often include lots of data about access to care, and the prevalence and financial health of providers, including profit / loss margins.

Here are some of the more interesting data on hospitals receiving Medicare payments:

  • The number of hospitals – 4,800 – and the range of services offered both continue to grow.
  • Hospitals reduced 30-day mortality rates across five prevalent clinical conditions and readmission rates improved slightly from 2008 to 2011.  Preventable hospital readmissions are a major contributor to wasteful health care spending.  As part of the Affordable Care Act (ACA), the Centers for Medicare and Medicaid Services (CMS) launched a Hospital Readmission Reduction Program that financially penalizes hospitals with high readmission rates, starting in FY 2013.  MedPAC’s report to Congress says it’s too early to say whether the program has reduced readmissions.
  • Overall Medicare hospital margins declined from -4.5 percent in 2010 to -5.8 percent in 2011, meaning hospitals on average serve Medicare patients at a loss. MedPAC expects the overall margin of roughly -6 percent to remain for 2013.
  • However, Medicare hospital margins were a positive 2 percent for hospitals that consistently perform well on cost, mortality, and hospital readmission measures.
Learn More About Hospital Payment Issues:

To learn more, read the full report, and please check out the MedPAC and hospital sections of this blog for more on a wide range of issues.  Also see my previous post about an interesting statistical brief on hospitalizations, Hospital Admissions: Trends in Hospitalizations.